A majority of the City Council is backing a tax-the-rich plan that would require hedge fund and private equity fund partners to pay a city tax on income generated by investments, making it more likely to gain traction in Albany.

Assemblyman Micah Kellner, who represents the Upper East Side, recently introduced a bill that would change the city’s tax law so it would apply to hedge fund and private equity managers.

Twenty-six of the council’s 51 members signed a letter in support of the tax proposal, which is being touted as a way to raise more than $200 million a year. As the council and Mayor Bloomberg near a July 1 budget deadline, members are searching for new ways to generate revenue for the city to protect favored programs and classrooms from anticipated budget cuts.

“With New York City facing tight budget projections in the years to come, it is incumbent on all of us to make sure everyone is paying their fair share of the tax burden before we ask those who depend on social services and public investments to suffer in the form of budget cuts to schools, mass transit, or health care,” the letter, provided by a supporter of the plan, states.

A copy of the letter is on its way to Governor Paterson and Albany lawmakers, one of the lead supporters of the plan, Council Member Melissa Mark-Viverito of Manhattan, said. The labor-backed Working Families Party and the Service Employees International Union are trying to push the proposal forward.

Opponents argue that raising taxes on some of the city’s wealthiest residents would drive them and their businesses from the city. Wall Street businesses already are reeling from the credit crisis, with some laying off employees.

The chairman of the New York Conservative Party, Michael Long, said the idea reflects the “typical anti-business attitude” embraced by members of the City Council.

“They really don’t understand economics, nor the dynamics of businesses and organizations that can pick up and leave the state of New York,” he said. “Then they will have no one to tax. It is really just an anti-business initiative.”

Members who did not sign onto the letter said the council is attempting to eliminate the city’s unincorporated business tax, which would need to be expanded to include the hedge fund and private equity partners for this proposal to work.

“The answer is just to eliminate it, not add to it,” a council member who represents parts of Queens and is chairman of the Finance Committee, David Weprin, said.

Partnerships, estates, trusts, and limited liability companies pay the unincorporated business tax. Independent contractors say their income is effectively taxed twice because of it.

Hedge funds and private equity funds, which are usually structured as partnerships, find the management fees they receive as part of their base compensation taxed by the city by the 4% unincorporated business tax, but the tax currently does not cover the “carried interest” the partners earn, which is typically a 20% share in the profits generated by investments they made.

Even though supporters of the bill concede that it is unlikely the proposal will win approval in time to have an impact on this year’s city budget, they say the projected budget gaps will keep them fighting for this tax plan.

The executive director of the Working Families Party, Daniel Cantor, said he thinks the budget crunch in the city and the fierce opposition to the mayor’s proposed education cuts will help the proposal win more supporters.

To avoid approving cuts to the Department of Education, council members have proposed raising the city’s hotel tax, an idea that Mr. Bloomberg has rejected. The mayor has indicated that he is willing to raise property taxes to generate more revenue for the city.

A second-term council member who represents parts of Brooklyn, Lewis Fidler, who did not sign letter in support of the tax scheme, said the council and the Bloomberg administration don’t appear close to reaching a budget deal.

“I don’t ever remember being this significantly apart this late in the month,” he said.